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L.A. County Attempts to Increase Taxes Without a Vote of the People

L.A. County Attempts to Increase Taxes Without a Vote of the People

There they go again!  Despite California's Constitutional prohibition against new taxes without a vote of the people, some local governments continue to impose new taxes without the requisite electoral vote.  The people of California have specifically created these Constitutional prohibitions to stop state and local agencies from abusing their authority and imposing excessive or unpopular taxes.  State and local agencies have repeatedly tried to circumvent these restrictions, and the people of California have been forced to further tighten these Constitutional prohibitions to prevent their abuse.  These prohibitions were created not through one but through three separate voter initiatives: Proposition 13 (1978), Proposition 218 (1996), and Proposition 26 (2010).  As the drafters of Proposition 218 stated, "[i]f local governments and the courts had not circumvented Proposition 13, Proposition 218 would not have been necessary."  Local governments and the courts continue to find new ways to circumvent these Constitutional prohibitions.

By Joseph A. Vinatieri and Patricia Verdugo

Recently, in 926 North Ardmore Avenue LLC v. County of Los Angeles (2014) 229 Cal. App. 4th 1335 ("North Ardmore"), Los Angeles County imposed a new documentary transfer tax (DTT) by retroactively reinterpreting the law to permit the imposition of the tax on certain legal entity transfers.  In other words, the county's position was that the tax always applied, but was only recently enforced by the county.  The Court of Appeals agreed with this retroactive reinterpretation, in part based on state legislative action and inaction "suggesting the Legislature endorses the view" or "generally intended" or "has signaled" its agreement or where the "Legislature has taken no action."  The Court of Appeals also stated that the taxpayer had "never identified any policy reason" for not imposing the tax on legal entity transfers.  The court then held that the county was permitted to impose the tax.  In so holding, the court failed to consider that the California Constitution prohibits the state legislature from merely "signaling" a new tax.  Instead, the California Constitution mandates the state legislature to impose new taxes only upon an affirmative vote of two-thirds of the legislature.  It also prohibits local governments from imposing general taxes absent a majority vote of the electorate or special taxes absent a two-thirds vote of the people.  Furthermore, the "policy" that prohibits the imposition of the new tax is the California Constitution, as amended by California voters in 1978, 1996, and again in 2010.  This "policy" provides that no new taxes may be imposed without the requisite legislative or electoral vote of the people.

If the decision of the Court of Appeals in North Ardmore is not overturned or depublished by the California Supreme Court, other local governments will use the decision to circumvent the California Constitution and the will of the people of California.  In response to the erroneous decision in North Ardmore, which upholds an unconstitutional tax, Bewley, Lassleben & Miller, LLP has submitted an amicus curiae requesting the California Supreme Court to order depublication of the decision.  Simply, North Ardmore is bad law, and, in order to prevent other local governments from attempting to circumvent the state Constitution, the decision must be depublished.   See BLM's request for depublication below or in pdf version at Bewley Lassleben & Miller - Request for Depublication of North Ardmore Decision.

November 20, 2014

Sent Via FedEx
The Honorable Tani Cantil-Sakauye,
Chief Justice and Associate Justices
California Supreme Court
350 McAllister Street
San Francisco, CA  94102-44797

            Re:      Letter of Amicus Curiae Bewley, Lassleben & Miller, LLP, requesting the Supreme Court to order depublication of the Decision of the Court of Appeal, Second Appellate District, Div. 7, No. B248536 in 926 North Ardmore Avenue LLC v. County of Los Angeles.

To the Honorable Chief Justice and Associate Justices:

The law firm of Bewley, Lassleben & Miller, LLP respectfully submits this letter pursuant to Rule 8.1125 as amicus curiae to request the Supreme Court to order depublication of the decision of the Court of Appeal, Second Appellate District, Div. 7, No. B248536 in 926 North Ardmore Avenue LLC v. County of Los Angeles (“North Ardmore”).  The decision became final on October 22, 2014.

Bewley, Lassleben & Miller LLP represents taxpayers owning real property in California, who will be negatively affected by the erroneous decision in North Ardmore.  The firm represents small businesses and Fortune 500 companies in a broad range of industries regarding California state and local tax matters.  The firm is committed to protecting its clients against unconstitutional taxes imposed by state and local agencies.  The decision in North Ardmore upholds an unconstitutionally imposed tax and sets a bad precedent for local taxing agencies who wish to circumvent the California Constitution and voter-approved will of the people.

The decision by the Court of Appeals in North Ardmore should be depublished because it upholds an unconstitutional tax.  The California Constitution prohibits the imposition of new or higher state taxes absent a two-thirds vote of the two houses of the state legislature and prohibits the imposition of new property taxes or sales taxes on real property.  (Cal. Const. art. XIII A, § 3.)  The California Constitution also prohibits local governments, such as cities, counties and special districts, from imposing general
taxes absent a majority vote of the electorate or special taxes absent a two-thirds vote of the electorate.  (Cal. Const. art. XIII C, § 2.)

I.          The California Constitution Imposes Restrictions on New or Higher Taxes.

The people of California have specifically created these Constitutional prohibitions to stop state and local agencies from abusing their authority and imposing excessive or unpopular taxes.  State and local agencies have repeatedly tried to circumvent these restrictions, and the people of California have been forced to further tighten these Constitutional prohibitions to prevent their abuse.  These Constitutional prohibitions were created not through one but through three separate voter initiatives: Proposition 13 (1978), Proposition 218 (1996), and Proposition 26 (2010).

California voters first passed Proposition 13 in 1978 to put a stop to excessive increases in property taxes and to require a two-thirds vote of the legislature for any increased state taxes.

Proposition 13 provided:

From and after the effective date of this article, any changes in State taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in methods of computation must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature, except that no new ad valorem taxes on real property, or sales or transaction taxes on the sales of real property may be imposed.

(Proposition 13, Cal. Const., art. XIII A, § 3.)

Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district.

(Proposition 13, Cal. Const., art XIII A, § 4.)

Despite the clear intentions of the voters in passing Proposition 13, local governments continued to subject “taxpayers to excessive tax, assessment, fee and charge increases that not only frustrate[d] the purposes of voter approval for tax increases, but also threaten[ed] the economic security of all Californians and the California economy itself.”  (Proposition 218, Section 2.)  In 1996, frustrated with local government’s abuse of loopholes in Proposition 13, California voters passed Proposition 218, the “Right to Vote on Taxes Act,” which prohibited local governments from increasing general or special taxes without voter approval.  The comments in the Statement of Drafters’ Intent stated: “If local governments and courts had not circumvented Proposition 13, Proposition 218 would not have been necessary.” (Proposition 218, Statement of Drafters’ Intent, Section 2 Comment (emphasis added), http://www.hjta.org/propositions/proposition-218/text-proposition-218-analysis/.)

Proposition 218 provided:

No local government may impose, extend, or increase any general tax unless and until that tax is submitted to the electorate and approved by a majority vote.

(Proposition 218, Cal. Const., art. XIII C, § 2(b).)

No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-third vote.

(Proposition 218, Cal. Const., art. XIII C, § 2(d).)

In 2010, California voters passed Proposition 26, the “Supermajority Vote to Pass New Taxes and Fees Act,” to prevent state and local governments from abusing loopholes in Proposition 13 and Proposition 218.  State and local governments were getting around these Constitutional prohibitions by referring to new taxes as “fees” or using other euphemisms for taxes.  In order to prevent this practice, Proposition 26 clarified that the term “tax” included “any levy, charge, or exaction of any kind” imposed by the state or by a local government, with limited and specified exceptions.  (Proposition 26, Cal. Const., art. XIII A, § 3(b) and art. XIII C, § 1(e) (emphasis added).)  Proposition 26 also placed the burden on the state or local government to prove “by a preponderance of the evidence that a levy, charge, or other exaction is not a tax . . . .”  (Proposition 26, Cal. Const., art. XIII A, § 3(d) and art. XIII C, § 1(e).)

Despite the clear message from the people of California, some local governments continue to attempt to circumvent these Constitutional restrictions.

II.        The Decision in North Ardmore Upholds an Unconstitutional Tax.

In North Ardmore, the Registrar-Recorder/County Clerk for the County of Los Angeles (the “County”) attempted to open another loophole in Proposition 13.  In North Ardmore, neither the County nor the state legislature met the Constitutional requirements for imposing a new documentary transfer tax (“DTT”).  Nonetheless, the Court of Appeals determined that the new tax was “signaled” by legislative action and inaction.  (926 North Ardmore Avenue, LLC v. County of Los Angeles (2014) 229 Cal. App. 4th 1335, 1363-64.)

In North Ardmore, the County demanded that the taxpayer pay a DTT where no document was actually recorded, but which resulted in greater than 50 percent interest in control of the legal entity being transferred (a “legal entity transfer”).  (Id. at 1340.)  Before 2010, the County had not collected the DTT on such legal entity transfers, and, in fact, had no statutory authority to collect such a tax.  (Id. at 1343 (“[I]n 2010, the County of Los Angeles had started assessing a documentary transfer tax whenever a legal entity had undergone a change of ownership within the meaning of state property tax law.”).)  Under the California Constitution, this new tax would have required voter approval, and no such approval was obtained.  Instead, the new tax was imposed pursuant to a new County policy which was published on the County’s web site.  (Id.)

The County attempted to circumvent the Constitutional requirements for a new tax by retroactively reinterpreting the DTT to include a tax on legal entity transfers.  (Id. at 1343-44 (“The collection is . . . consistent with case law . . . .”).)  The Court of Appeals agreed with this retroactive reinterpretation, in part based on legislative action and inaction “suggesting the Legislature endorses the view” or “generally intended” or “has signaled” its agreement or where the “Legislature has taken no action.” (Id. at 1359, 1361, 1363, and 1364.)  The County and the Court of Appeals specifically referenced a January 1, 2010, amendment to California Revenue & Taxation Code (CRTC) § 408, which allowed “recorders to obtain information pertaining to these transfers from the Assessor.”  (Id. at 1343.)  This 2010 amendment was enacted by Senate Bill 816 during the 2009-2010 regular session.  (Stats. 2009, ch. 622.)  However, SB 816 authorized disclosure of appraisal information; it did not authorize the imposition of new or higher taxes.

SB 816 provided:

Existing property tax law requires the assessor to disclose certain appraisal information to specified state and local agencies.

This bill would expand the list of state and local agencies the assessor is required to disclose certain appraisal information to include the county recorder when conducting an investigation to determine whether a documentary transfer tax is imposed.

(Legislative Counsel’s Digest, Sen. Bill No. 816 (2009-2010 Reg. Sess.) Sec. 1.)

Even if the California legislature intended by SB 816 to authorize a new or increased tax, it would have been required by the state Constitution to pass the amendment by a two-thirds vote, which it did not do.  The legislative history indicates that SB 816 only required a majority vote and received 49 out of 80 votes in the Assembly and 28 out of 40 votes in the Senate, failing to meet the two-thirds voting requirement for increased taxes.  (Complete Bill History, Sen. Bill No. 816 (2009), http://www.leginfo.ca.gov/pub/13-14/bill/sen/sb_0801-0850/sb_816_bill_20130909_history.html.)

Notably, during its 2013-2014 regular session, the California legislature proposed and considered Assembly Bill 561 (AB 561), which would have authorized the imposition of the DTT on legal entity transfers at issue in North Ardmore.  (Assembly Bill 561 (2013-2014 Reg. Sess.).)

AB 561 provided:

Existing law authorizes counties and cities and counties to impose a documentary transfer tax at a specified rate upon deeds, instruments, or writings by which lands, tenements, or other realty sold are transferred.

This bill would provide that “realty sold” for purposes of the imposition of a documentary transfer tax includes, but is not limited to, any acquisition or transfer of ownership interests in a legal entity that would constitute a change in ownership of that legal entity’s real property, as specified.

(Legislative Counsel’s Digest, Assembly Bill No. 561.)

The State legislature did not pass AB 561; the proposed bill died in committee.  In other words, the legislature did not authorize the DTT on legal entity transfers.  Furthermore, even if, arguendo, the state legislature had passed the bill by a two-thirds vote, at best, the amendment would have only authorized the County to pass an ordinance to impose the tax.  (Cal. Rev. & Tax Code §11911 (“The board of supervisors of any county or city and county, by an ordinance adopted pursuant to this part, may impose, on each deed, instrument, or writing by which any lands, tenements, or other realty sold within the county . . . a tax . . . .”).)  The County would have been required to submit the ordinance or an amended ordinance to a vote of the electorate, which it did not do.   In North Ardmore, neither the state legislature nor the County met the Constitutional mandates for a new tax.

Nonetheless, the Court of Appeals in North Ardmore determined that the California legislature “signaled – both through the acts it has taken and the acts it has not – that the transfer tax should be interpreted to apply” to legal entity transfers.  (North Ardmore, 229 Cal. App. 4th at 1363.)   It further stated that the taxpayer had “never identified any policy reason that would support imposition of a transfer tax when realty is transferred through a direct sale, but not when realty is transferred through the sale of an LLC established solely to hold the realty.”  (Id.)   The Court of Appeals then held that the County was permitted to impose the DTT to legal entity transfers.  (Id. at 1364)  In so holding, the Court of Appeals failed to consider that the California Constitution prohibits the state legislature from “signaling” a new tax.  Instead, the California Constitution mandates the state legislature to impose new taxes only upon an affirmative vote of two-thirds of the legislature.  Furthermore, the “policy” that prohibits the imposition of the DTT on these transfers is the California Constitution, as amended by California voters in 1976 through Proposition 13, in 1996 through Proposition 218, and again in 2010 through Proposition 26.  This “policy” provides that no new taxes may be imposed without the requisite legislative or electoral vote of the people.

III.       North Ardmore Should Be Depublished.

In failing to consider these Constitutional mandates, the Court of Appeals in North Ardmore erroneously upheld the imposition of an unconstitutional tax.  Simply, North Ardmore is bad law, and, in order to prevent other local governments (like Los Angeles County) from attempting to circumvent the state Constitution, the decision must be depublished.

Sincerely,

BEWLEY, LASSLEBEN & MILLER

JOSEPH A. VINATIERI, ESQ.
PATRICIA VERDUGO, ESQ.

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